Trends Watch: Portfolio Construction

EisnerAmper’s Trends Watch is a weekly entry to our Alternative Investments Intelligence blog, featuring the views and insights of executives from alternative investment firms. If you’re interested in being featured, please contact Elana Margulies-Snyderman.  

This week, Elana talks with Stephen Perrino, Managing Partner, Excelsior Investment Advisors.

What is your outlook for hedge funds?

Hedge funds appear to be well positioned to take advantage of volatility in the markets that could lie ahead.  With the possibility of inflation and rising rates, investors are looking for alternatives to their equity and bond portfolios. 

Where do you see the greatest opportunities and why?

We specialize in hedge fund manager selection and portfolio construction, believing the best approach is to maintain a portfolio of hedge funds that have a low correlation to each other.  While many of our competitors have permitted industry or sector concentration, during periods like March 2020, these decisions were quite costly.  Excelsior believes that by maintaining a strict rebalance protocol and focus on portfolio construction, we are best equipped to mitigate the downside and participate in the upside. We see the greatest opportunity by maintaining strict adherence to our internal policies.

What are the greatest challenges you face and why?

A key part of performing operational and investment due diligence is spending time onsite at a hedge fund so that you can see firsthand the operational and investment processes.  Over the last year, many managers have not permitted face-to-face meetings.  This creates a challenge since you are not able to see the operations taking place under one roof because it no longer is following that model.  While most of these meetings over the last year were virtual, we were able to satisfy ourselves with our existing manager lineup.  These virtual calls were with the same professionals we met with onsite in years past.  However, COVID-19 has impacted our ability to finalize new manager allocations. We follow a strict protocol of having boots on the ground for all new allocations.

That said, the world appears to be heading back to reopening and many hedge funds are adopting staggered in-office workweeks or have opened new offices in different parts of the country.  We have begun having onsite meetings with new managers, allowing us to write new allocations in our portfolio.

What keeps you up at night?

What keeps me up at night is the same matter that keeps many managers up at night.  Having staff working remotely creates many security challenges.  Staff working from home may have access to sensitive information in a secure environment.  Unfortunately, such information could be also shared inadvertently with that staff’s household members or others.  In addition, there is the added burden of leaving printed pages in one’s home, which is outside the control of the office environment shredding protocol. 

Trading errors are similarly concerning.  While every hedge fund has a trading process unique to its internal systems, there is still a greater likelihood that a trade error could occur.  With everyone working remotely, there is also a greater likelihood that such an error could also take longer to resolve. 

As firms are beginning to open and return to the office, there have been many changes to most hedge funds in office work protocol.  These changes could keep the relevance of the above concerns higher than normal until the firm returns to equilibrium. Examples of these changes include a part-week in the office work week, opening of additional offices, relocation of the firm’s primary office from one state to another, and/or taking on additional floors in the existing building. The challenge to hedge funds is to keep all firm processes such as idea generation, trading, trade settlement, pricing, net asset value computations, and compliance working as smoothly as before, while adapting to all these changes.

The views and opinions expressed above are of the interviewee only, and do not/are not intended to reflect the views of EisnerAmper.